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The Â£3bn (â¬4.4bn) London Pension Fund Authority is offering innovative managers a chance to run Â£1bn in global equities and new balanced strategies.

Peter Scales, LPFA: We are not keen on shorting â that is trading rather than investing

Legal & General Investment Management and Henderson Global Investors are likely to lose their mandates in the shake-up, although they have been given the chance to retender.

The rejig forms part of a trend towards the use of greater diversification and flexible strategies by UK pension funds.

The LPFA, the fifth-largest UK local authority scheme, has put few conditions in the tender documentation in order to attract the best ideas but has said it will divide funds into three separate mandates.

LPFA uses innovative strategies, including Private Finance Initiative funds and stock-lending.
The three mandates that are up for grabs will not necessarily have a long-term contractual structure. But the authority will be flexible about the content, style and focus it is seeking.

Peter Scales, chief executive, said the successful applicants for global equities could have a particular style, small-cap or regional bias. Their benchmark index will be a matter for discussion and cap-weighted indices could be considered.

Scales said it was up to asset managers to present their case and convince the investment committee. But he was not keen on appointing growth and value managers to divide the £600m pot. “Styles tend to negate each other,” he said.

The third mandate is to outperform retail price inflation by 5% and will be worth about £340m. It will be created as the scheme dissolves a conventional active bond mandate.

Again, Scales said he was open to new ideas. “At the moment we would not invest in pork belly futures but if someone made the case we might consider them,” he said.

He registered caution at permitting a target return mandate to include shorting. “We are not desperately keen on shorting. That is moving to trading rather than investing.”

But he did not rule out the strategy. As part of its restructuring, the authority will also offer a currency overlay mandate.

Goldman Sachs Asset Management’s quantitative-based equity mandate from the authority will grow as part of the restructuring. A bottom-up, global stockpicking strategy, seeded by the fund and run by Goldman, was halted this year.

For the three years to March 31, the authority’s active sub-fund underperformed its benchmark by 1.7% and over one year by 1.2%. Although the fund must take responsibility for asset allocation decisions, stock selection by external managers was blamed for half of the 12-month underperformance and 0.8% of the three-year underperformance.

Scales envisaged no change to the fund’s allocation to alternatives. It holds about £200m in indirect property and private equity, with a small allocation to primary and secondary Private Finance Initiative investments.

About £1.3bn of assets are in a mature sub-fund, whose asset allocation is under review but is likely to seek overall returns of 1.5% over index-linked gilts. The less-mature sub-fund looks after £1.7bn with some strategies common to both.

Most of the pensioner sub-fund’s assets are in index-linked bonds held to maturity.

The remainder forms part of an equity-tracking mandate of Legal & General and Henderson’s active bond mandate.